What type of contract involves payment for actual costs of labor and materials plus an additional fee?

The correct choice describes a contract structure where a contractor is compensated for the actual costs incurred in the performance of a project. This includes the direct costs for labor and materials, along with a fee that acts as profit or overhead.

A time and materials contract is particularly useful in situations where the scope of work is not clearly defined at the outset, making it difficult to estimate a total price. This type of contract allows the project to proceed as work progresses, with the contractor invoicing based on the time spent and materials used.

On the other hand, a fixed-price contract establishes a set price for the entire scope of the work beforehand, which can lead to financial risks for contractors if costs exceed their estimates. A cost-plus contract also fits the description of paying for actual expenditures plus a fee but is typically structured differently, often including a guaranteed maximum price. A service contract usually focuses on payment for services rendered rather than a combination of labor and materials costs.

Thus, the choice representing a payment structure based on direct costs plus an agreed-upon fee is accurately identified as a time and materials contract.